By Kosta Kioleoglou
The property market has been at the center of investors’ interests in recent years. Majority of Kenyans in one way or another have participated in this market and have been part of a crazy price race that produced great returns for the last five years.
Investing as individuals, companies, family groups, investment groups, Chamas or cooperatives, millions of people placed their lifetime savings and their future in the “hands” of the property market. The profits produced during the same period are huge but a majority of investors today cannot show their profits via a bank account statement as most of it has been reinvested in the market again and again.
The problem is that the market does not seem to have the same traction or vitality today as it did a few years ago. Actually, according to available data, reports and HPI’s published during the last couple of years the market seems to be stagnating if not going down. The latest House Price Index published by the Kenya Bankers Association for the second quarter of 2016 is one more proof that we need to be skeptic about investing in real estate and the future of the property market in Kenya.
Being skeptic does not mean being negative. In every market there are always opportunities but you have to be able to identify the correct time and the right option to place your money and not rush into any available project just because it seems like the market is doing ok.
A few days ago the Kenya Bankers Association released the House Price Index for Quarter 2. The 1.74% increase of the HPI for the second quarter of 2016 compared to the 1.4% rise during the first quarter reflected an uptick in housing prices with the movement representing a not very promising future for the country’s most popular sector of the economy. The property market’s performance for the first half of 2016 follows 3 years of very mild price changes. This is confirmed by the evolution of the KBA-HPI, which as at the end of the second quarter of 2016, had risen by almost 11% since the base period of the first quarter of 2013. That is an average of 0.262% per month or an average price increase of 3.14% annually. The index, according to the information provided by the KBA official website, is measured by averaging the price changes in the house purchase prices including mortgage financing and refinancing appraisals, giving a very good picture of the market trend.
The demand and supply market dynamics have not been subject to significant changes over the period. The supply of housing units has been in response to the broad demand characteristics in the market. In several areas, especially in Nairobi, supply has overcome demand and investors are already facing challenges. The new units being put up in the market are mainly targeting the middle end of the market, with the lower end experiencing supply constraints arising mainly from the tendency of developers inclining more towards renting than selling.
Nairobi is the first area to feel the heat of the market. Investors in several neighborhoods in the capital are feeling pressure from a slump in property prices and rentals as an obvious excess supply is creating new market conditions. With prices remaining stagnant in some areas and other areas like Kilimani producing negative results as selling prices have dropped more than 5 % since last June, the property market dynamics are challenged. Mombasa on the other hand has been hammered from the drop in the tourism industry over the last few years. That directly affected the real estate sector too.
Over the last few months, developers and market makers are focusing on projects around Nairobi where several satellite cities have been producing good returns after the Nairobi market stopped being a lucrative option. Unfortunately, the reality of the market is affecting these areas too. A good example is Mlolongo, the satellite town along Mombasa Road, which according to available data and reports has seen prices falling during 2016.
The market seems to be confusing investors. While the estimated need for housing is more than the supply, how come the market might not be lucrative?
People seem not to understand what is going wrong since everybody keeps saying that there is a huge deficit of houses around the country. There is a need of 250,000 houses annually when only 50,000 are built every year. So, when supply does not meet demand then prices should keep going up! Well, I have said it before and I will repeat one more time. The rule of supply and demand has been used inappropriately in Kenya. The truth is that there is a very big demand for housing in the country, maybe even more than the 250,000 houses per year. Did anyone ever say what types of houses are needed? For what budget, which size, which quality and what is the target group of people who can afford to buy these houses? The answer is NO!
The reality is that a lot of the houses that have been developed in Kenya over the last years are not affordable to majority of people. Everyone that could afford to buy a house has already bought at least one. Market speculators have been using this “imaginary” deficit of housing in the capital for the middle to upper class. They have been creating a possibly non-existent demand initially pushing the land prices up and then the property market.
The problem is that when the prices do not represent the real market values, then the possibility of a market downturn is very strong. Depending on the market dynamics that could be translated to a price collapse. On the other hand, the mortgage market in Kenya is extremely small. Basically, banks tried to stay out of the property market as much as possible.
A little over 24,000 are the total active mortgages countrywide, a number that represents the low interest in the financial sector to participate in this market. Even though the banking sector has been exposed as little as possible to the market, the implications of the supply – demand showdown have already been reflected in the number of loans reported as bad loans in the real estate sector. The Central Bank of Kenya (CBK) has reported that during the first quarter of 2016 bad loans in the real estate sector increased by nearly half, causing a “red” alert to the banking sector.
Over the last few years, real estate has been dominating investment interests of Kenyans looking to identify lucrative opportunities to place their lifetime savings. One of the most popular scheme attracting thousands of investments and billions of shillings in volume was the “Buy to let” investment option. Having headlines supporting the industry promising a secure future in the sector with great returns, people’s thirsts to be part of that opportunity rose leading to quick decisions. But today, the KBA house price indexes as well as market reports from internationally recognized organizations are presenting a different reality. The market’s performance does not look so lucrative or promising.
Analyzing the actual figures, one can get really worried. From 2015, the market signs were not looking very good as a slow uptake and a rising supply of residential buildings pushed prime rents down in 2015. That was followed by further decrease as rent for prime residential buildings in Nairobi decreased by 2.9% in the first quarter of this year. The fall in rental prices has been attributed to rising supply and falling demand for these properties, giving tenants choice and room to negotiate with landlords. In several areas, more buildings are coming up and supply is overcoming demand. Projects completed almost two years ago remain vacant. In areas like Kilimani, one can see the number of signs advertising properties to let increasing day after day.
High-end areas have been mainly targeting expats working for foreign companies, the UN and NGO’s. The fact that there are rumors recently that the country is pressuring thousands of expat NGO workers and volunteers to go home is another reason to worry about further pressure on this sector of the market. It makes me really wonder who is going to rent the thousands of properties around Nairobi that are available for rental with prices that for the majority of the Kenyan population are definitely not affordable. The next question is if these properties cannot be rented as was initially estimated who is going to pay for the losses?
In the near future, the challenges in the market will be several. One of the least expected was the recent Brexit vote in the UK. After the latest Brexit news and the vote by the UK to leave the European Union, the market is about to face, possibly, further pressure. With the caveat that nothing is really clear in the immediate aftermath of a seismic event like the one that happened on Thursday, June the 23rd, there are different opinions and speculations on how the economic forces that have been unleashed will affect the markets.
If you are involved in this market then you need to get prepared in order to avoid further losses, minimize the risk and do some damage control and possibly even to be able to capitalize a momentum and make some profits. So you need to keep in mind that all markets fluctuate. Every investor has to follow the trends, cannot remain stagnant and inflexible.
The sooner you get a tenant for your vacant property the less the damage from a non-producing investment. There are several examples of those who said no to a deal a few months ago simply because they did not want to realize the actual market values. Today, they wish they had taken up that offer as the property remains vacant, supply is more and prices keep going down.
When you decide to invest you should be ready for every worst-case scenario. Investments include risks as much as they can promise profits. There is no reason to panic. On the contrary you need now more than ever to stay calm, patient and up to date with the market evolution and news. After such an amazing race over the last years, a cooling down period should eventually be expected. Being prepared is what will protect you and produce the best results. Kenya is a country with amazing potential. During a period, such as this, full of challenges, being skeptic and thinking twice before making any decision is always good advice.
